FORUM Credit Union's website works best with JavaScript enabled

Do you really understand credit scores?


A credit score is a concept that most consumers don’t fully understand and often don’t realize it is used more than just by financial institutions.  Understanding what a credit score is and how it is used can be extremely important. It is also important to understand the difference between a credit report and a credit score.
 
What would give as the basic definition of a credit score?
All types of companies rate your credit worthiness and send it to credit bureaus.  The credit bureaus then use a predictive scoring model that will predict a person’s likelihood of paying bills on time or how they might handle credit or even their propensity to file insurance claims. 
 
FICO is the most common score, are there others?
Even though FICO is the most common, there are other modeling scores. It is important to note that FICO is a score not a reporting agency. There are three major credit score reporting agencies or bureaus. Some lenders or for some types of loans a tri-merge score from all three bureaus are used.  And the three scores from the bureaus can be different even if using the same credit scoring model.
 
What is a good credit score?
The range for almost all credit scoring companies is 301 to 850.  Excellent is 750 or higher, Fair is between 650 – 699 and anything below 600 is considered to be a negative score. 
 
What are the components of a credit score?
The primary components of a credit score are a person’s payment history, credit limit utilization, length of credit history, number of new credit or inquiries and the mix of in types of accounts meaning revolving vs instalment and unsecured vs secured types of loans.
 
Why do financial institutions use a credit score?
A person’s past performance and current amount of debt are two leading indicators of their future desire and ability to repay loans. Credit scores provide financial institutions with an amount of risk in each score range and their expected losses or incidents of poor payment history.
 
Do lenders look at things other than the score?
Yes, lenders will consider if your credit score trend is it going up or down and also the circumstances for your credit score if it is low.  For example, if you are just starting out, a lower credit score is more understandable than a low credit score for someone who has had credit for a longer period of time.
 
What are credit scores used for besides loan decisions?
There are insurance specific credit scores that help insurance companies rate individuals for pricing, several companies use credit scores as part the employment process and many companies such as satellite, cable and cell phone companies use credit to determine if service will be provided.
 
How often do you recommend people review their credit report?
An annual review of your credit report is the recommended frequency because you want to review it for reporting errors, fraudulent loans and ensure your identity hasn’t been stolen. There are so many ways your credit score is used, having bad information could be costing you more for loans and other services.  You can get your report by contacting one of the three major bureaus - Equifax, Experian and TansUnion.  Credit scores are not included with free annual credit reports but can be purchased from the bureaus as part of purchasing a credit report.


Posted: 3/24/2016 with 1 comments

Categories: Credit, Money Matters



Comments
My Credit Unions
I really appreciate this article. Lots of folks dont understand what Credit is or how it affects them on a daily basis.
3/25/2016 5:34:56 PM

Subscribe
 Security code